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Modification and remeasurement of a lease

Example 5-13 and Example 5-14 illustrate the accounting for the modification of an operating lease.

EXAMPLE 5-13

Modification of an operating lease that does not impact lease classification

On January 1, 20X1, Lessee Corp enters into a contract with Lessor Corp to lease property to be used
as a retail store.

The following table summarizes information about the lease and the leased assets at lease inception.

Lease commencement date January 1, 20X1

Initial lease term 5 years, no renewal option

Purchase option None

Annual lease payments $500,000 in the first 2 years and $510,000 in
each year thereafter

Payment date Annually on January 1

Economic life of the asset 40 years

Fair value of the asset $7,000,000

Other Title to the asset remains with Lessor Corp upon
lease expiration

Lessor Corp classified the lease as an operating lease because it does not meet any of the criteria to be
classified as a sales-type lease or as a direct financing lease.

On January 1, 20X4, Lessee Corp and Lessor Corp amend the original lease contract to increase the
term of the lease for an additional three years. The revised annual lease payments are $507,000 for
the next two years and $509,000 for the three years added to the term. The increase in lease
consideration is at a discount to the current market rate for the additional term for this particular lease
contract. On January 1, 20X4, the accrued rent asset is $8,000.

How would Lessor Corp account for the lease modification?

Analysis

Determine if the lease modification is a separate new lease

Since the change in pricing of the lease is not commensurate with the standalone price and there is no
additional right-of-use (increase in lease term is not considered an additional right of use), Lessor
Corp should not account for the modification as a new lease, separate from the original five-year lease.
Lessor Corp would account for one new modified lease as of January 1, 20X4.

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